A few nuggets wrapped in so much business-speak that it’s genuinely hard to read. There’s only so many times I can hear terms like “enhancing shareholder value,” “new-market disruptive growth businesses,” and “earn attractive returns on lower gross margins” before my eyes glaze over. I found myself tuning in and out, and would suddenly realize that I remembered nothing from the last 20 minutes of reading.
Also, like so many business books, it’s not clear if this book gives you tools that are predictive (i.e., useful in the future) or merely observational (i.e., are just describing something that happened in the past). The parts that lovingly describe the innovation of RIM and the Blackberry, and then not long after, explain that the camera phone likely has no future, make me doubt some of the “theoretical models” proposed in this book.
Nevertheless, there is a bit of good content hidden in these pages:
The limit is process, not creativity
- The problem discussed in The Innovator’s Dilemma, where large, established companies can rarely create new innovations and get disrupted by newcomers, is rarely caused by a lack of ideas.
- The real problem is usually in how ideas are selected and shaped.
- When some new product idea comes along and disrupts a large established company, in many cases, that large company had known about that idea all along, and had perhaps even tried to build it themselves, but failed to do so due to the way the company prioritized, funded, and developed products.
- In other words, the ability of big businesses to innovate is limited by process, not creativity.
How to create disruptive products
The main way to create a “disruptive” product is to:
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Stage 1: open a new market segment.
- Come up with a technology or approach that gives a market segment access to a product they could never access before.
- In this stage, your product can be worse than your competitors, as you’re actually competing against non-usage: that is, the customers in that segment can’t use any of the alternative products (e.g., because they are too expensive or require too much expertise), so they’ll still gladly buy your inferior product.
- Moreover, this segment usually offers lower margins and will seem like a small market, so your larger competitors will often gladly abandon that market to you, so they can chase higher margin opportunities elsewhere.
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Stage 2: move up market.
- Once you’ve established a foothold in that market segment, gradually improve the technology more and more to move “up market” and capture more and more market share.
- By the time the competitor realizes what has happened, your lead with the new technology will be too great for them to overcome.
Segment markets by the problem to solve
Segment markets by the situation (i.e., the problem to be solved) and not by the attributes of the customer or product.
For example, if you were selling milkshakes:
- Segmenting by attributes: E.g., people who like thick milkshakes vs thin ones, sweet vs non-sweet, etc.
- Segmenting by problem to solve: E.g., people who need something to eat during a long commute, people who want to buy their kids a treat, etc.
If you segment based on the problem to be solved, you’ll realize that:
- The attributes only matter in terms of how they help to solve that problem: E.g., for the commuter, you’ll want a product that can last through a long commute (thick!) and can be eaten with one hand, while driving, without making a mess (a nice container with a straw).
- Your competitors aren’t just other milkshakes, but other foods commuters might consider: E.g., bagels, egg sandwiches, donuts, etc.
Integrated vs modular design
Integrated vs modular design is determined by whether the technology is “good enough.”
For example, computers:
- Initially, they were integrated. In the 60s and 70s, computers weren’t fast enough, so the most successful companies tended to be integrated, building all the parts and software themselves to eke out every possible gram of performance.
- Later, they were modular. As hardware improved, computers offered way more performance than a typical customer could use, which opened the door for modular parts and outsourcing.
Trade-offs:
- Modular design is always a compromise, but if you have performance to spare, it offers advantages in terms of time to market and margins that make it worthwhile.
- Modular design forces integrated solutions to move up market, to the most demanding market segments that are still competing on performance.
Your cost structure influences your values and culture
Most companies will never prioritize work that results in lower profit margins. The profits you hope to generate will drive:
- The products that your company will build
- The customers you’ll approach
- The people you hire
- And many other aspects of your company
This fact is so pervasive that it becomes hard to see, as you won’t even consider other options. Therefore, think about cost structure very carefully!
Design your company to target the right customer
Design your company so your ideal customers can deliver the profits you need:
- Figure out which customers you’re really after
- Figure out the type of profit margins you want in your business
- Make sure that the products you build can deliver the type of profits you’re after when sold to your ideal customers
- The worst thing that could happen is that your ideal customer is ready to sign, but the deal would not be profitable enough if you signed them!
